Introduction to Securitization / Edition 1

Introduction to Securitization / Edition 1

ISBN-10:
0470371900
ISBN-13:
9780470371909
Pub. Date:
07/15/2008
Publisher:
Wiley
ISBN-10:
0470371900
ISBN-13:
9780470371909
Pub. Date:
07/15/2008
Publisher:
Wiley
Introduction to Securitization / Edition 1

Introduction to Securitization / Edition 1

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Overview

Introduction to Securitization outlines the basics of securitization, addressing applications for this technology to mortgages, collateralized debt obligations, future flows, credit cards, and auto loans. The authors present a comprehensive overview of the topic based on the experience they have gathered through years of interaction with practitioners and graduate students around the world. The authors offer coverage of such key topics as: structuring agency MBS deals and nonagency deals, credit enhancements and sizing, using interest rate derivatives in securitization transactions, asset classes securitized, operational risk factors, implications for financial markets, and applying securitization technology to CDOs. Finally, in the appendices, the authors provide an essential introduction to credit derivatives, an explanation of the methodology for the valuation of MBS/ABS, and the estimation of interest rate risk.

Securitization is a financial technique that pools assets together and, in effect, turns them into a tradable security. The end result of a securitization transaction is that a corporation can obtain proceeds by selling assets and not borrowing funds. In real life, many securitization structures are quite complex and enigmatic for practitioners, investors, and finance students. Typically, books detailing this topic are either too lengthy, too technical, or too superficial in their presentation. Introduction to Securitization is the first to offer essential information on this topic at a fundamental, yet comprehensive level-providing readers with a working understanding of what has become one of today's most important areas of finance.

Authors Frank Fabozzi and Vinod Kothari, internationally recognized experts in the field, clearly define securitization, contrast it with corporate finance, and explain its advantages. They carefully illustrate the structuring of asset-backed securities (ABS) transactions, including agency mortgage-backed securities (MBS) deals and nonagency deals, and show the use of credit enhancements and interest rate derivatives in such transactions. They review the collateral classes in ABS, such as retail loans, credit cards, and future flows, and discuss ongoing funding vehicles such as asset-backed commercial paper conduits and other structured vehicles. And they explain the different types of collateralized debt obligations (CDOs) and structured credit, detailing their structuring and analysis. To complement the discussion, an introduction to credit derivatives is also provided.

The authors conclude with a close look at securitization's impact on the financial markets and the economy, with a review of the now well-documented problems of the securitization of one asset class: subprime mortgages. While questions about the contribution of securitization have been tainted by the subprime mortgage crisis, it remains an important process for corporations, municipalities, and government entities seeking funding. The significance of this financial innovation is that it has been an important form of raising capital for corporations and government entities throughout the world, as well as a vehicle for risk management. Introduction to Securitization offers practitioners and students a simple and comprehensive entry into the interesting world of securitization and structured credit.


Product Details

ISBN-13: 9780470371909
Publisher: Wiley
Publication date: 07/15/2008
Series: Frank J. Fabozzi Series , #174
Pages: 384
Product dimensions: 5.90(w) x 9.10(h) x 1.40(d)

About the Author

Frank J. Fabozzi, PhD, CFA, CPA, is Professor in the Practice of Finance at Yale University's School of Management, Editor of the Journal of Portfolio Management, and Associate Editor of the Journal of Structured Finance and the Journal of Fixed Income.

Vinod Kothari, chartered accountant, is an author, trainer, and consultant on securitization, asset-based finance, credit derivatives, and derivatives accounting. Kothari is a visiting faculty member at the Indian Institute of Management, where he teaches structured finance.

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Table of Contents

Preface xiii

About the Authors xvii

Part One Background 1

Chapter 1 Introduction 3

What Is a Securitization? 5

Illustration of a Securitization 8

Securities Issued in a Securitization 10

Key Points of the Chapter 11

Chapter 2 Issuer Motivation for Securitizing Assets and the Goals of Structuring 13

Reasons Securitization Is Used for Funding 13

Structuring Goals 21

Key Points of the Chapter 24

Part Two Structuring ABS Transactions 29

Chapter 3 Structuring Agency MBS Deals 31

Prepayments and Prepayment Conventions 31

Sequential Pay Structures 38

Planned Amortization Class Bonds and Support Bonds 43

Targeted Amortization Class Bonds 50

Accrual Bonds and Accretion-Directed Bonds 50

Floating Rate Bond Classes 55

Notional Interest-Only Bond Classes 60

Key Points of the Chapter 61

Chapter 4 Structuring Nonagency Deals 65

Identification of the Asset Pool 68

Selection of the Assets 69

Identification of Risks 70

Determination of the Sources and Size of Credit Support 72

Determination of the Bond Classes 73

Time Tranching of Bond Classes 75

Selecting the Pay Down Structure for the Bond Classes 76

Determination of the Amount and Sources for Liquidity Support 77

Determining if Any Prepayment Protection Is Needed 78

Inclusion of Structural Protection Triggers 79

Key Points of the Chapter 80

Chapter 5 Credit Enhancements 85

Credit Enhancement Mechanisms 86

Sizing of Credit Enhancements 93

Key Points of the Chapter 97

Chapter 6 Use of Interest Rate Derivatives in Securitization Transactions 101

Interest Rate Swaps 101

Caps and Floors 115

Counterparty Risk 118

Key Points of the Chapter 120

Chapter 7 Operational Issues in Securitization 123

The Servicing Function 124

Types of Servicers 124

Servicer Strengths 125

Servicer Qualities 128

Servicing Transition 141

Backup Servicer 142

Reporting by the Servicer 142

Role of Trustees in Operation of the Transaction 143

Fraud Risk 144

Key Points of the Chapter 145

Part Three Review of ABS Collateral 147

Chapter 8 Collateral Classes in ABS: Retail Loans 149

Collateral Classes: Basis of Classification 149

Collateral Classes: Main Types 152

Credit Card Receivables 153

Auto Loan Securitization 161

Key Points of the Chapter 165

Chapter 9 Asset-Backed Commercial Paper Conduits and Other Structured Vehicles 169

Types of ABCP Conduits 170

Traditional Securitization and ABCP 173

ABCP Collateral 174

Credit Enhancement Structure 174

Liquidity Support 177

Parties to an ABCP Program 178

Rating of ABCP Conduits 180

Key Points of the Chapter 182

Chapter 10 Securitization of Future Cash Flows: Future Revenues, Operating Revenues, and Insurance Profits 187

Future Revenues Securitization 187

Whole Business or Operating Revenues Securitization 195

Securitization of Insurance Profits 204

Key Points of the Chapter 206

Part Four Collateralized Debt Obligations 209

Chapter 11 Introduction to Collateralized Debt Obligations 211

Why Study CDOs? 211

Terminology: CDO, CBO, CLO 212

Types of CDOs 213

Typical Structure of a CDO 217

Basic Economic Drivers of CDOs 220

CDO Market and the Health of Banking 224

Growth of the CDO Market 225

Key Points of the Chapter 227

Chapter 12 Types of Collateralized Debt Obligations 229

Balance Sheet CDOs 229

Arbitrage CDOs 243

Resecuritization or Structured Finance CDOs 249

Index Trades and Index Tracking CDOs 251

Key Points of the Chapter 252

Chapter 13 Structuring and Analysis of CDOs 255

Measures of Pool Quality 255

Asset and Income Coverage Tests 257

Ramp-Up Period 261

The CDO Manager 261

Investing in CDOs 265

Collateral and Structural Risks in CDO Investing 266

Key Points of the Chapter 270

Part Five Implications for Financial Markets 273

Chapter 14 Benefits of Securitization to Financial Markets and Economies 275

Securitization and Funding Costs 277

Securitization and Financial Intermediation 281

Benefits of Securitization in an Economy 284

Key Points of the Chapter 288

Chapter 15 Concerns with Securitization’s Impact on Financial Markets and Economies 291

Reduces the Effectives of Monetary Policy 291

Adverse Impact on Banks 293

Lax Underwriting Standards and Poorly Designed Securities 294

Increases Opaqueness of Bank Risk 300

Key Points of the Chapter 302

Appendix A  Basics of Credit Derivatives 305

Elements of a Credit Derivative Transaction 306

Bilateral Deals and Capital Market Deals 310

Reference Asset or Portfolio 311

Structured Portfolio Trade 312

Types of Credit Derivatives 321

Appendix B  Valuing Mortgage-Backed and Asset-Backed Securities 325

Cash Flow Yield Analysis 325

Zero-Volatility Spread 327

Valuation Using Monte Carlo Simulation and OAS Analysis 328

Measuring Interest Risk 339

References 343

Index 349

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